Sequestration Elucidation

The House Armed Services Committee this morning convened a hearing to discuss the "economic consequences of defense sequestration."

InsideDefense.com reported earlier this month that if Congress fails to agree on a long-term deficit reduction plan, the massive cuts that would follow would be "devastating" to the defense industrial base and prompt a "fundamental rethinking of our industrial strategy," according to a senior Pentagon official. Further, the Oct. 14 story reads:

Brett Lambert, deputy assistant secretary of defense for manufacturing and industrial base policy, said last week that if the $1 trillion in mandatory military spending cuts are imposed, the Defense Department would consider overturning a keystone of the Pentagon's current industrial-base policy -- allowing market forces to drive the shape of the industrial base.

"Everyone uses 'devastating' because it is the right word," Lambert said in an interview about the impact on the defense industrial base from cuts mandated under the Budget Control Act's "sequestration" provision, which kicks in if Congress this fall does not hammer out a plan to reduce the overall federal deficit by $1.2 trillion to $1.5 trillion.

The Pentagon's industrial policy shop is wrapping up a new industrial base assessment, directed earlier this year by the deputy defense secretary, that is designed to provide DOD leaders a higher-fidelity representation of the health of private-sector firms, both domestic and foreign, that manufacture the U.S. military arsenal.

Pentagon leaders are using the findings of that not-yet-complete assessment to shape decisions on how to cut more than $450 billion from the military budget over the next decade, as required by the August debt-ceiling agreement between the White House and Congress.

"Under the current plan, I think we're on the ragged edge or maintaining a robust and healthy industrial base at the sub-tier level," Lambert told InsideDefense.com on Oct. 4. "If you go much lower, then you're talking about fundamentally changing the strategy of our industrial policy where you're not likely to allow market forces to be as robust as they have been to the benefit of the taxpayer and the warfighter."

The new assessment -- dubbed the "Sector-by-Sector, Tier-by-Tier Assessment of the Defense Industrial Base" -- is revealing "some fragility" among lower-tier companies that provide components critical to major weapon systems (DefenseAlert, Oct. 5).

House Armed Services Committee Chairman Buck McKeon (R-CA) had this to say about sequestration in his opening statement at this morning's hearing:

As a fiscal conservative, I tend to oppose increasing government spending for the purpose of job creation. But I think we must understand that the defense industry is unique in that it relies entirely on federal government dollars. We don't spend money on defense to create jobs.  But defense cuts are certainly a path to job loss, especially among our high skilled workforces.  There is no private sector alternative to compensate for the government's investment.

Secretary of Defense Panetta has said that cuts on the scale of sequestration will result in a 1% hike to unemployment and 1.5 million jobs lost. The Aerospace Industries Association released a report yesterday, based on the analysis of Dr. Fuller, one of our witnesses today, that estimated just over one million industry jobs would be lost – based on cuts to procurement and R&D alone.  When one factors in the separation of active duty service members and DOD civilians, the number is quite close to DOD's. The impact is not proportional across all 50 states. Dr. Fuller's testimony suggests that nearly 60% of the jobs lost would come from just 10 states. One-third of the lost jobs would fall in three states – California, Texas, and Virginia. How does this translate to the larger economy?  In 2013 alone, growth in GDP would fall by 25%.

But the economy could be affected further, as the U.S. military might no longer be seen as the modern era’s pillar of American strength and values. There is risk that some within the international community would try to take advantage of the fragile American economy and the perceived limitations on our military's ability to promote global stability.

In these difficult economic times, we recognize the struggle to bring fiscal discipline to our nation.  But it is imperative that we focus our fiscal restraint on the driver of the debt, instead of the protector of our prosperity.

Committee Ranking Member Adam Smith (D-WA), however, feels that raising taxes needs to be part of the governmental debt-reduction equation. According to his opening statement:

If we can avoid sequestration, I believe that we can rationally evaluate our national security strategy, our defense expenditures, and the current set of missions we ask the military to undertake and come up with a strategy that requires less funding; indeed the Department of Defense is currently focused on just such an evaluation. Sequestration would make that rational evaluation impossible, which is why it must be avoided. But it is also important that we address the revenue side of our budget problem. Recently, some of my colleagues on this committee issued dire warnings about the potential impacts of additional defense budget cuts. I share their concerns, and that is why we must consider raising additional revenue. In order to avoid drastic job losses caused by cuts to our military and other important programs, revenue must be on the table.

It is my hope that this hearing will help remind everyone here that we have to make some serious choices.  Our budget problems must be looked at in a comprehensive manner.  If we are serious about not cutting large amounts of funding from the defense budget, something else has to give.  Large, immediate, across the board cuts to the defense budget, which would occur under sequestration, could do serious damage to our national security.  They would also likely result in thousands, if not tens of thousands, of Americans losing their jobs.  Sequestration would have a similar impact on American workers in cutting other non-entitlement spending.  In order to avoid these large cuts and the resulting job losses, we’re going to have to stop repeating ideological talking points and address our budget problems comprehensively, through smarter spending and enhanced revenue.